1. why are ratios used to analyze the financial statements of organizations? 2.
ID: 2467105 • Letter: 1
Question
1. why are ratios used to analyze the financial statements of organizations?
2. When common size ratios are prepare, each asset is compared to (...............) and every expenses compared to (.........)
How do common size ratios help compare organizations?
3. How do you evaluate a ratio for a specific year?
4. Why might too much liquidity be a problem for an organization? Why might too "Little" liquidity be a problem for an organization?
5. Discuss when and why different profitability ratios might be used?
Explanation / Answer
1. Ratios are commonly used tools to anyalyse the financial information as they are:
a. Easy to understand and simple to compute
b. They can be used to compare results accross companies in different industries
c. Ratios do not take into account the size of the company or the industry and as such can be uses to compare small businesses with big businesses
d. Ratios help us identify the strenghts / weaknesses of the business
e. They help in analysing information like - ability of a company to pay off both its current as well long term liabilities, time it takes the company to collect cash from customers, company's ability to generate profits from its operations etc
2. Each asset is compared to Total assets and each expense is compared to Total Revenue
Common size analysis helps us to identify large or drastic changes in a firm, rapid increases or decreases will be readily identifiable and suitable measures can be taken by the business to improve performance. It provides comprehensive and clear conclusion to a company
3. Evaluate a specific year using the below ratios:
a. Current ratio
b. Return on assets
c. Profit Margin
d. Assets turnover
Compare the above results with that of competitors, identify whihc ratios are best suited to evaluate strengths, weaknesses and opportunities for the company
4. Too much liquidity could mean that the company is not using the resources to get more business oportunities, the extra cash in the business carries an opportunity cost which is the difference between interest earned on holding cash and the price paid for having cash as cost of capital.
Too little liquidity means the company is unable to pay off its current liabilities
5. Profitability ratios help us to compare income statement accounts and the company's ability to generate profits. They cna be used to understand:
a. Company's return on investements in inventory and other assets
b. Company's ability to achieve profits from operations
c. Company's return on investments based on its usage of available resources and assets, in other words is the company putting its assets to the best use
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.